The Evolution of Global Payroll
Not too long ago, global companies operated country payroll operations as independent functions and deployed expatriates in local countries for subject matter expertise. Payroll professionals, under this practice, dealt with expat compensation for compliance and tax reporting for the host country. To face rapid changes in business strategies and to better manage profits & losses (P&L), companies have developed more robust strategies to monitor country-specific compliance and global reporting. These organizations have placed payroll professionals as strategic partners in developing payroll models that fit companies’ visions.
While a single model does not meet requirements for all companies, we outlined below examples of different models and the advantages and challenges for each to help you determine what is best for your company. During your evaluation, keep in mind other factors impacting this decision, such as if your payroll function is managed by your human resources or finance team, how employees are serviced with local language and culture, technology, and third-party service provider capabilities.
Global Payroll Models
Outsourced: The gross to net and compliance services are entirely outsourced to a third-party vendor.
In-house: Companies employ and manage payroll personnel and expertise in each country it operates.
Partially Outsourced: Organizations process some countries’ payroll in-house, while some are processed by third-party vendors.
Centralized: Companies combine internal payroll governance and management with one single outsourced entity that manages all in-country global payroll providers.
Decentralized: Businesses combine internal payroll governance and management with multiple outsourced entities based on region.
Localize: Organizations combine internal payroll governance and management with a separate in-country provider.
Advantages and Challenges of Various Global Payroll Models
In-house
Requires building systems and processes from ground zero in addition to having local compliance and subject matter experts.
Advantages:
- Provides 100% internal governance and control
- Freedom to establish regional and local operations
- Single reporting system
Challenges:
- Major cash investment
- Lack of flexibility
- Keeping up with compliance and other changes
- Lack of contingency systems
Outsourced
In an outsourced model, a single-service provider manages multiple countries’ payroll and coordinates all aspects related to activities with the company.
Advantages:
- Single vendor contract
- Less internal systems and resources
- Can set Service Level Agreements with vendors based on internal needs and requirements
Challenges:
- Single solution may not be the right solution based on company’s demographics
- Vendor Management
- Single source of service provider
- Cost
Partially Outsourced
In a partially outsourced environment, companies choose the countries where it manages the systems and processes internally. The other countries are outsourced to a single vendor or a local county payroll vendor.
Advantages:
- Internal control for countries with a large employee population
- Vendor selection by region
- Regional and/or local payroll systems
- Local or regional cost and pricing
Challenges:
- Management of multiple vendors
- Multiple systems
- Lack of global reporting
- Compliance risk and issues
In addition to determining the payroll delivery model, organizations should formalize a payroll service model. The service delivery model will largely depend on the number of employees in a country, language barriers and organizational structure. It is certainly possible to have a combination of the models defined below. For example, you can choose the regional model but still carve out a particular country to have a local service delivery model to meet the employee and organizational needs. The following are the service delivery models and their advantages and challenges:
Centralized
The organization manages in-house or outsourced payroll systems and activities from a centralized location.
Advantages:
- Full control
- Freedom to streamline processes
Challenges:
- Lack of knowledge on all countries’ compliance and processes
- Language barriers
- Chosen systems may not have availability for specific countries’ configurations
- The cost of implementation for countries where employee population is low
Decentralized
Companies manage payroll operations for multiple countries based on the employee population from one country (e.g., shared services model).
Advantages:
- Provides regional expertise for compliance and payroll processes
- Based on the regional location, employees can be serviced in their time zone
Challenges:
- Regionalized management
- Some countries and locations may still not be a good fit for regional processing
Localized
The company manages payroll operations in each country whether it is in-house or outsourced to a third-party.
Advantages:
- County-specific compliance and payroll resources
Challenges:
- Global reporting
- Cost
- Multiple vendors
Important Factors in Determining the Model for your Company
It’s not an easy task to build systems or processes for the unknown. Below are a few important factors to consider when establishing a global payroll model:
- The number of employees in every country the company operates in
- Compliance risk management
- How payroll cost is managed (i.e., globally, regionally or locally; and related currency issues)
- What your current payroll model is and how it meets your existing requirements and future initiatives
- Data privacy
- Time zones and employees’ servicing and languages, in which a company is required to communicate with employees
- Technology based on requirements and organizational strategy for future growth
Choosing the Right Model
Your global payroll management system should ultimately satisfy your organization’s current needs and requirements but remain flexible in order to manage future growth. Financially, a full implementation is a major burden that requires time to implement. By having the right payroll model, your organization can lower your compliance risk and deliver cost-effective results in efficient processes.
At Sikich, we have professional resources that can help organizations assess current global payroll strategies to provide recommendations, assist in vendor selection and implement a robust global payroll strategy. Please contact us to learn more.
